in a Professionally Managed Portfolio Derivatives traded Exchange Introduction................................................................................................. 3 Futures Contracts ........................................................................................ 5 Enhancing Investment Portfolio Performance........................................... 7 Investing in Managed Futures .................................................................. 11 Evaluating Managed Futures Investments ............................................... 13 Conclusion................................................................................................. 21 Appendix 1—Glossary of Terms ............................................................. 22 Appendix 2—Industry Information Sources ........................................... 24 Appendix 3—Bibliography ...................................................................... 25 Table of Contents 3 This brochure provides an overview of managed futures, which is taken here to mean professionally managed investment portfolios of exchange-traded derivatives (futures and options on futures contracts). Derivatives are financial products designed to offer a profit/loss payoff that mirrors certain aspects of the returns of the instruments on which they are based, such as securities, commodities and currencies. Derivative products include futures contracts, forward contracts, warrants, swap contracts and related options. The advantage of exchange-traded derivatives is that regulated exchanges provide clearing and regulatory safeguards to investors. Introduction Over the past two decades, the choice of investment opportunities has grown from “traditional” instruments such as stocks, bonds and real estate, to include mutual funds, hedge funds, foreign securities and managed futures. Today’s sophisticated international markets pro- vide new profit opportunities to investors. The ability of managed futures to access these opportunities has led to the rapid growth of these investment vehicles. Figure 1 illustrates the growth of assets invested in managed futures from 1980 through 1998. Figure 1: Growth of Managed Futures Industry 1980–1998 Assets under management ($ in billions) 45 40 35 30 25 20 15 10 5 0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: Managed Account Reports 4 Using managed futures allows investors to benefit from: • changes in interest rates and equity markets around the world; • currency exchange rate shifts; and • changes in global supply and demand for agricultural products, precious and industrial metals, and energy products such as oil and natural gas. Because of the broad range of products and instruments encompassed by managed futures, their addition to a traditional portfolio can provide global diversification in financial instruments and currencies; help hedge against inflation and deflation; and generate returns that are not correlated with more traditional investments. The following sections of this publication describe the fundamentals of managed futures and explore the bene- fits of a managed futures investment. They also offer insight into evaluating managed futures investments and explain how to invest, as well as identifying resources for further information. A Look at the Managed Futures Industry: Then and Now Feb 1979 Feb 1999 Number of Advisors 17 317 Number of Advisors: Assets over $100 million 0 44 Most Assets/Advisor $6.6m $2.2b Estimated Assets in Managed Futures $.3b $39.9b Source: Managed Account Reports 5 Generally, buyers and sellers tend to offset their respec- tive positions in the futures market before actual delivery takes place—that is, selling a futures contract if they previously had bought one, or buying a futures contract if they previously had sold one. In fact, only a small fraction of all futures contracts are held until expiration and fulfilled by delivery. Both buyers and sellers of futures have the obligation to settle the change in value of their contracts on a daily basis. Futures contracts are traded on organized exchanges in the U.S. and in a number of countries around the world. The rules and regulations of U.S. exchanges are intended to support competitive, liquid and efficient markets, as well as safeguard market participants. The Commodity Futures Trading Commission (CFTC), a U.S. federal regulatory agency, helps enforce exchange self-regulation and ensure market integrity of U.S. markets. Figure 2 shows the annual futures and options trading volume on U.S. exchanges from 1968 through 1998— an increase of 10,500% over the time period. Much of the growth is attributable to the creation of financial futures and options and the increasing worldwide need for risk management products. An overview of managed futures begins with a description of futures contracts. A futures contract is a legally binding agreement designed to allow buyers and sellers to lock in a price on a well-specified good (e.g., physical commodity, fixed-income security, equity index, or currency) on a forthcoming settlement date. Futures Contracts Example 1: Currency Futures A Chicago Mercantile Exchange Swiss franc futures contract is for 125,000 Swiss francs for delivery in March, June, September or December. Say the June contract price is $0.6532 per Swiss franc. A buyer of the contract at that price is obligated to buy 125,000 Swiss francs for $81,650 (125,000 x $0.6532) in June; a seller of the contract at the same price is obligated to sell 125,000 Swiss francs for $81,650. The value of this contract for each party may increase or decrease, depending on market price fluctuations of the underlying asset, but the price to which they are obligated does not change. Therefore, 125,000 Swiss francs may be worth more or less than $81,650 in June, but the buyer and seller complete the transfer at that amount, as agreed to in the futures contract. Example 2: Stock Index Futures Assume an investor expects the stock market to rise in the near future. He or she could purchase one S&P 500® stock index contract at, say 1400. If the market rises to 1410, the investor would offset this position by selling one S&P 500 contract at 1410 for a gain of $2,500 {(1410–1400) x $250 = $2,500}. 6 Figure 2: Volume of Futures and Options Trading On U.S. Futures Exchanges 1968–1998 Volume in millions of contracts traded 1200 1000 800 600 400 200 0 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source: Futures Industry Association 7 Adding managed futures to a portfolio of traditional investments can provide many benefits that enhance overall performance. These benefits are discussed below. Portfolio Diversification Modern portfolio theory emphasizes the benefits of diversification, and professional investors in increasing numbers are turning to “alternative” investments with low or negative correlation to “traditional” investments. Academic studies (for example, see articles cited in Appendix 3) have shown that managed futures have gen- erated positive returns during periods when returns from traditional investments have been flat or negative. This “non-correlation” of returns can help in reducing the overall volatility of a portfolio (see Figure 3). Global Investment Opportunities Because of the broad scope of exchange-traded derivatives, the managed portfolio that includes these instruments gains global diversification by allowing investors access Enhancing Investment Portfolio Performance to overseas stock and bond markets, as well as foreign currencies. Futures markets offer a number of trading vehicles that mirror international markets; some of these are listed in Figure 4. High Return Potential Managed futures can generate very attractive returns. As Figure 5 illustrates, the historic returns on managed futures are comparable to and often exceed the returns on traditional investments. This chart shows that a man- aged futures account can yield significantly greater gains than traditional investments. While the source of these returns is a matter of continuing study, some futures trading advisors maintain that they can generate superior returns in times when hedgers are changing their positions. Furthermore, such traders contend that they can use the leverage and low transaction costs inherent in futures trading to quickly and efficiently exploit market inefficiencies. Figure 3: Correlation Matrix For the period 7/1/89 to 6/30/99 Barclay Barclay S&P 500® Lehman Bonds Futures Index CTA Index S&P 500® Total Return 1.00 0.37 –0.20 –0.07 Lehman Gov’t Bonds Index 0.37 1.00 –0.05 0.15 Barclay Futures Index –0.20 –0.05 1.00 0.42 Barclay CTA Index –0.07 0.15 0.42 1.00 Source: Barclay Trading Group 8 Figure 4: Global Diversification Managed futures offer essential portfolio diversification, providing access to an array of markets and contracts. Interest Rates Stock Indexes Metals Currencies Treasury Bonds Nikkei 225 Gold Euro FX Treasury Notes S&P 500 Silver Swiss Franc Eurodollars S&P MidCap 400 Platinum Japanese Yen LIBOR Russell 2000® Copper Canadian Dollar Nasdaq 100® Aluminum British Pound Palladium Australian Dollar Mexican Peso Industrials Grains Softs Meats Other Crude Oil Wheat Cocoa Cattle GSCI® Heating Oil Corn Cotton Feeder Cattle Foreign Futures Gasoline Oats Coffee Hogs Lumber Soybeans Sugar Pork Bellies Orange Juice 9 Figure 5: Year-By-Year Returns: Various Asset Classes Large International Long-Term U.S. GSCI Barclay Barclay Company Stocks Treasury Treasury Collateralized CTA Futures Year Stocks EAFE Bonds Bills Inflation Futures Index Index 1971 14.31 31.21 13.23 4.39 3.36 21.08 1972 18.98 37.60 5.69 3.84 3.41 42.43 1973 –14.66 –14.17 –1.11 6.93 8.80 74.96 1974 –26.47 –22.15 4.35 8.00 12.20 39.51 1975 37.20 37.10 9.20 5.80 7.01 –17.22 1976 23.84 3.74 16.75 5.08 4.81 –11.92 1977 –7.18 19.42 –0.69 5.12 6.77 10.37 1978 6.56 34.30 –1.18 7.18 9.03 31.61 1979 18.44 6.18 –1.23 10.38 13.31 33.81 1980 32.42 24.43 –3.95 11.24 12.40 11.08 63.69 31.18 1981 –4.91 –1.03 1.86 14.71 8.94 –23.01 23.92 31.23 1982 21.41 –0.86 40.36 10.54 3.87 11.56 16.67 12.46 1983 22.51 24.61 0.65 8.80 3.80 16.26 23.75 3.65 1984 6.27 7.86 15.48 9.85 3.95 1.05 8.74 14.18 1985 32.16 56.72 30.97 7.72 3.77 10.01 25.50 21.78 1986 18.47 69.94 24.53 6.16 1.13 2.04 3.83 10.48 1987 5.23 24.93 –2.71 5.47 4.41 23.77 57.28 16.21 1988 16.81 28.59 9.67 6.35 4.42 27.93 21.75 8.04 1989 31.49 10.80 18.11 8.37 4.65 38.28 1.79 8.26 1990 –3.17 –23.19 6.18 7.81 6.11 29.08 21.01 16.88 1991 30.55 12.49 19.30 5.60 3.06 –6.13 3.73 6.11 1992 7.67 –11.85 8.05 3.51 2.90 4.42 –0.91 6.86 1993 9.99 32.94 18.24 2.90 2.75 –12.33 10.37 8.08 1994 1.31 8.06 –7.77 3.90 2.67 5.29 –0.65 4.78 1995 37.43 11.55 31.67 5.60 2.54 20.33 13.65 3.44 1996 23.07 6.36 –0.93 5.20 3.32 33.92 9.13 14.01 1997 33.36 2.06 15.85 5.26 1.70 –14.10 10.90 9.73 1998 28.58 20.33 13.06 4.86 1.61 –35.75 7.00 9.03 Annualized Returns: 1980–1998 Stocks (S&P 500) 17.7 Barclay CTA Index 15.8 International Stocks (MSCI EAFE) 14.2 Long-Term Bonds (Lehman Gov’t. Bond Index) 11.8 Treasury Bills (3 mo. U.S. T-bills) 7.0 Ability to Profit from Down and Up Markets Like “hedge funds,” managed accounts and commodity pools enjoy the ability to take short positions (that is, to sell futures), thereby profiting from subsequent price declines. It is not uncommon for a given Commodity Trading Advisor (CTA) to maintain long positions in some markets and short position in others. Inflation and Deflation Hedge Because managed futures can profit from the rising or falling prices of a wide range of commodities, including precious metals and oil that are particularly sensitive to the economic environment, trading programs can be designed to profit from major shifts in the general level of prices. For example, the presence of, say, Goldman Sachs Commodity Index (GSCI) futures in a managed account can provide fully diversified, world production- weighted commodity exposure, all in a single futures instrument. High Liquidity Unlike other investments, such as real estate, investments in managed futures often are structured to be highly liquid, allowing investors to easily add or withdraw assets. The intervals at which funds may be withdrawn from managed funds vary from daily for some managed accounts to monthly or quarterly in commodity pools. Government-Regulated CTAs, CPOs, FCMs and the futures exchanges where the contracts are traded are government-regulated. Regulatory oversight of futures trading by the exchanges, the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) provides assurance of market integrity. 10 Clearing Organization-Guaranteed Contract Performance Managed futures accounts, like all other accounts of customers doing business through a U.S. exchange, must be executed by and carried on the books of a “clearing member” (a brokerage firm or FCM that holds a membership in an exchange’s clearing organization). Once a trade between two clearing members is matched by the exchange, the rights and obligations under the futures or options contract do not run between the original buyer and seller—instead, they are between the buyer and the clearing organization, and between the seller and the clearing organization. An exchange’s clearing organization guarantees performance on every contract to each of its clearing members. Although each exchange’s clearing function operates somewhat differently, at minimum they all ensure that there are sufficient resources to meet obligations by: (1) collecting performance bonds; (2) marking contracts to the market at least once daily; and (3) establishing capital requirements and maintaining minimum financial standards for clearing members. Further information regarding CME financial safeguards is available in the publication entitled The Financial Safeguard System of the Chicago Mercantile Exchange. Assets Earn Interest Income In most managed futures situations interest income is earned on all or a portion of funds invested. An investment in managed futures can be made either through a managed account or through a commodity pool. The latter is also known as a commodity fund or futures fund. What is a Managed Account? A managed account is an individual brokerage account with a brokerage firm (formally known as a Futures Commission Merchant or FCM) in which discretionary authority to direct trading is delegated to a Commodity Trading Advisor (CTA). The investor must enter into an advisory agreement with the selected CTA and must deposit funds into a trading account at a mutually agreed on FCM. What is a Commodity Pool? A commodity pool is generally a limited partnership in which the funds invested by the partners are combined for allocation to an investment with one or more CTAs. A Commodity Pool Operator (CPO) acts as general partner. Commodity pools may use one or more CTAs. When multiple CTAs are used in a single pool, the diversification effect is similar to investing in a mutual fund; the investor has access to a diverse group of CTAs rather than relying on the performance of a single CTA. To invest in a commodity pool, limited partnership interests in the pool are purchased from the pool’s CPO or selling agent. Figure 6 illustrates the general structures of a Managed Account and a Futures Fund. Managed Futures Professionals The professional money managers who actually make managed futures trading or investing decisions are known as Commodity Trading Advisors (CTAs). CTAs employ a variety of strategies to take advantage of profit opportunities in the futures markets. A given CTA may have as clients one or more individual investors whose 11 accounts are traded by the CTA, and/or one or more commodity pools. Commodity Pool Operators (CPOs) organize and operate managed futures funds. Their activities include soliciting and monitoring the CTAs that will manage the fund’s money. CTAs and CPOs are required to be registered with, and are regulated by, the NFA and the CFTC. The CPO, as general partner, handles the pool’s operation, structure, administration, CTA selection, CTA monitoring and investor reporting. A given CPO may operate one or more commodity pools and hire one or more CTAs. An individual or entity that advises clients (CPOs or individual investors) about CTAs and manages the allo- cations to CTAs is called a Manager of Managers or a Trading Manager. The manager maintains detailed performance and background information on many CTAs and usually evaluates them. Using criteria specific to each allocation, a Manager of Managers selects and monitors a group of CTAs for his or her clients. Minimum Investment The minimum investment required varies, depending on the type and structure of the investment. For a managed account, it is set at an amount that the CTA considers adequate to implement its programs and to achieve proper account diversification. Depending on the CTA and trading approach, this amount may range from $25,000 to $5,000,000. For pooled investments, limited partner- ship interests may range from $2,000 to $5,000,000. Also, minimum investment size varies depending on whether the investment is designed principally to service individual investors or corporate clients. Investing in Managed Futures 12 Figure 6: Structures General Structure of a Managed Account General Structure of a Futures Fund Investor Trading Manager (Registered Investment Advisor) Futures Markets General Partner (Commodity Pool Operators) Limited Partner (Investor) Limited Partnership Clearing Firm (FCM) Commodity Trading Advisors Futures Markets Clearing Firm (FCM) Commodity Trading Advisors Disclosure Document To evaluate a managed futures investment, careful con- sideration should be given to the information contained in the Disclosure Document. CTAs and commodity pools are required by the CFTC to provide a Disclosure Document to all potential investors. This document includes such information as the background and expe- rience of the CTAs and CPOs and their principals, track records of past performance, a description of the trading strategy and risk control measures, as well as fees and compensation. Track Records CTAs and commodity pools must report their actual per- formance records, also known as track records, for the previous three years. CTAs normally include their entire track records. If a CTA has no past performance, or is using hypothetical performance, this fact also must be disclosed. Commodity pools also must include the past performance of all other pools that the CPO has operated in the previous three years and the performance of the pool’s chosen CTAs. Although past performance is no guarantee of future per- formance, track records should be reviewed carefully prior to investment, as they show historic returns and losses, as well as the program’s volatility. It also is important to read the accompanying footnotes to fully understand what the numbers in the table include and represent. Investors are often surprised that managed futures as a class can exhibit less volatility with smaller drawdowns than many traditional investment choices. 13 Risk vs. Return in Managed Futures Trading The typical investor focuses a great deal of attention on returns and frequently asks, what kind of return can I expect on a given investment. This is unfortunate and leads investors to chase the highest returns. The result is that investors who concentrate on returns will sometimes forget to consider the risks taken to generate those returns. For example, let’s compare two CTAs: CTA #1 and CTA #2. CTA #1 has an annualized compounded return over the last 10 years of 24.0%. CTA #2 has an annual- ized compounded return of 25.0% over the same time period. CTA #2 clearly has a performance advantage. But, performance figures alone don’t tell us how much risk each manager has taken. The investor has to ask: How much additional risk (if any) was taken by CTA #2 in generating the higher returns? Higher returns generally (but not always) require taking greater risks. One percentage point of added return may be worth some additional risk, but most experts agree that that amount of added return is not worth substantially higher risks. (It is possible that #2 took equal or even less risk and generated a greater return. It is this kind of “value added” an investor seeks—getting the best returns possible while taking the least amount of risk.) Evaluating Managed Futures Investments 14 10-Year Risk-free* Standard Sharpe Manager Ann. Return Interest rate Deviation Ratio CTA # 1 24% 5.00% 20% .95 CTA # 2 25% 5.00% 30% .67 * 3-mo U.S. Treasury bill rate is generally used as risk-free rate. Clearly, in this example, CTA #2 has taken significantly more risk as measured by standard deviation. A dramatic increase in risk should also bring greater returns. CTA #2 beat CTA #1 by only one percentage point despite taking much higher risk. An investor has to decide what returns are acceptable for a given amount of risk. To match the Sharpe Ratio of CTA #1, CTA #2 would have to have had returns of 33.5%! At that point, the additional return would justify the risk according to this method of assessing risk versus return. Drawdown Standard deviation and Sharpe ratio can be used to evaluate risk and returns for a CTA. In addition, some investors also like to see how a manager fared during a bad trading spell. This is measured by calculating the maximum drawdown. Maximum drawdown simply measures the greatest decline experienced after reaching a given peak, over a period of time usually extending over most or all of a manager’s track record. As an example, if an account declined from a peak of $120,000 down to a low-point of $80,000 then the peak-to-low drawdown (or maximum drawdown) would be said to be 33%. Drawdown is another way that an investor can compare the volatility of a manager’s trading style. Larger draw- downs are usually seen by CTAs with high risk and stan- dard deviations. Careful though! A CTA with extremely low risk could conceivably suffer a massive loss that leads to a substantial drawdown. Along with drawdown, some managers will calculate worst 12-month period (or worst 3- or 6- month period) and the length of time it takes to recover from a drawdown. Tools for Measuring Risk Three common tools that are used to measure risk and return are: 1) Standard Deviation 2) Sharpe Ratio 3) Drawdown Standard Deviation Standard deviation is a statistical measure of the range of a money manager’s performance. In many circles, standard deviation is a proxy for risk. If an account has a high stan- dard deviation, its range of performance has been very wide—indicating there is a greater potential for volatility. Standard deviation is usually expressed as a percentage and is usually an annualized number. Annualized stan- dard deviations of 35% would be considered high (although some managers take extraordinary risk and exceed 50%). Some managers have a lower risk style and have standard deviations below 20%. Sharpe Ratio In the CTA example above, we mentioned that using return numbers by themselves does not provide enough information about the risks taken to generate a given return. The Sharpe Ratio allows an investor to analyze returns in conjunction with the risks taken to obtain those returns. The Sharpe Ratio is calculated as follows: Annualized Return – Risk Free Rate (T-bills) Annualized Standard Deviation An example using the two CTAs above will illustrate how the Sharpe Ratio can be a tool in appraising returns and risk. 15 Table A: Performance Table Increase Brokerage (Decrease) Gross Commis- Net in Realized sions and Realized Unrealized Trading Net Monthly Beginning With- Profit Interest Misc. Profit Profit Advisor’s Perfor- Ending Rate of Equity Additions drawals (Loss) Income Expenses (Loss) (Loss) Fees mance Equity Return Index (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) Feb. $ 0 $226,424 $ 0 $ 3,026 $ 906 $ 35 $ 3,897 $ (488) $ 742 $ 2,667 $229,091 1.20% 1,012 Mar. 229,091 212,128 2,118 (1,853) 916 1,750 (2,687) 14,387 2,471 9,230 448,331 2.10% 1,033 Apr. 448,331 22,071 0 2,187 1,793 7,485 (3,505) 21,329 3,468 14,356 484,758 3.10% 1,065 May 484,758 106,409 0 (20,977) 1,939 2,033 (21,071) (3,883) (2,102) (22,852) 568,315 –3.90% 1,023 June 568,315 38,727 3,485 11,759 2,273 555 13,477 (4,680) 451 8,346 611,903 1.40% 1,037 July 611,903 462,349 1,985 (5,084) 2,448 185 (2,821) 113,766 17,945 93,000 1,165,267 8.70% 1,127 (9) Trading Advisor’s Fees—These represent compensation earned by the Trading Advisors from the accounts under management. Negative fees occur in those months where subsequent trading losses reduced compensation previously earned, but not yet payable. (10) Net Performance—Net Performance equals (7) Net Realized Profit (Loss) plus (8) Increase (Decrease) in Unrealized Profit (Loss), less (9) Trading Advisor’s Fees. (11) Ending Equity—Ending Equity equals (1) Beginning Equity plus (2) Additions, minus (3) Withdrawals, plus (10) Net Performance. (12) Monthly Rate of Return-—The rate of return is computed by dividing the (10) Net Performance by (1) Beginning Equity. Monthly Rate of Return may also be determined using a “Time- Weighting” method which is calculated by dividing (10) Net Performance by the weighted average of (1) Beginning Equity plus (2) Additions minus (3) Withdrawals. The weighted average is computed by dividing the sum of each respective daily Beginning Equity plus Additions less Withdrawals balance, before reinvested profits or losses occurring during the month, by the number of days in the month. (13) Index—The index represents the value of a hypothetical $1,000 investment assumed to have been made at the beginning date of the performance record. The index is calculated by adding the prior month’s (13) Index to the product of the prior month’s (13) Index multiplied by the current month’s (12) Monthly Rate of Return. The Index is not intended to reflect the performance of any one individual account and is based on the compounded composite performance of all accounts. The Index assumes a continuous investment with no subsequent additions, with- drawals or distributions of accumulated profits. How to read a performance table Table A is an example of a typical 13-column CTA performance table. The left side of the table identifies the year and month of the activity. Following is a brief explanation of each column: (1) Beginning Equity—Beginning Equity includes all funds avail- able for trading. Beginning Equity equals the (11) Ending Equity from the previous period. (2) Additions—Additions are the amounts credited to the trading accounts during the period, generally new accounts or increased allocations from existing accounts. (3) Withdrawals—Withdrawals are the amounts, other than through sources of expense, removed from the accounts during the period. (4) Gross Realized Profit (Loss)—Gross realized profits or losses represent the trading gains and losses on closed futures con- tract positions. (5) Interest Income—Interest income represents interest earned on U.S. Treasury bills (or other obligations) deposited as margin or certain cash balances on deposit with FCMs. (6) Brokerage Commissions & Misc. Expenses—Brokerage com- missions are charged by the FCMs for clearing futures trades. Miscellaneous expenses include exchange fees and National Futures Association per-trade transaction fees; they may include other taxes and charges. (7) Net Realized Profit (Loss)—Net realized profit or loss equals (4) Gross Realized Profit (Loss) minus (6) Brokerage Commissions and Miscellaneous Expenses. (8) Increase (Decrease) in Unrealized Profit (Loss)—This column represents the increase or decrease from the preceding month in open futures contract positions. Unrealized profits and losses are calculated at the end of each month based on con- tract sizes and the differences between the futures contract closing price and the price at which the contract was initially purchased or sold. Investment Strategy The investment strategy describes how the CTA will invest or trade, what money management techniques will be used, and what markets will be traded. The trading approach generally can be categorized as systematic or discretionary. Systematic traders rely primarily on trading programs or models that generate buy and sell signals. Trades are selected, entered and exited according to such models, not permitting human intervention in the process. Discretionary traders rely on their experience and judgment, rather than on any formalized system or model in making their trading decisions. CTAs also rely broadly on either of two types of analysis as a basis for trading decisions: technical or fundamental. Fundamental analysis is the study of external factors that affect the supply and demand of a particular commodity in an attempt to forecast future prices. Such factors might include weather, government policies, domestic and foreign political and economic events changing trade prospects. Technical analysis studies market prices them- selves. Technical strategies generally involve a detailed look at such data as daily, weekly and monthly price fluc- tuations, volume variations, changes in open interest and chart patterns. CTAs may use a combination of systematic and discre- tionary trading techniques, as well as a combination of fundamental and technical analysis. 16 Markets Traded A diversified CTA might trade a number of markets ranging from livestock to foreign currencies and non-U.S. fixed income futures and options on futures. Specialized CTAs might invest in specific market sectors, such as currency instruments or energy products. Fees and Expenses CTA Compensation: CTAs typically are paid a fee for managing the fund or managed account (a management fee) and a portion of the trading profits (an incentive fee). The management fee is calculated as a percentage of assets under management and is paid on a monthly or quarterly basis. For example, if the CTA’s annual man- agement fee is 2% of the assets managed per annum, paid on a monthly basis, and he has $1 million under manage- ment, at the end of the month he would receive a man- agement fee of $1,667 ($1,000,000 x .02/12 = $1,667). The incentive fee is paid as a percentage of net new profits, i.e., a portion of gains achieved above the previous high equity level. For example, if the CTA’s incentive fee was 20% of net new profits and the CTA earned a 30% return by the end of the fee period, which may be monthly, quarterly or annually, the incentive fee paid would be $60,000 ($1,000,000 x .30 x .20). In a losing period, the CTA would still receive a man- agement fee, but not an incentive fee. A new incentive fee could only be earned after the loss was recouped and new profits were generated. CPO Compensation: CPOs also are paid a management fee. In addition, they may earn an incentive fee under some commodity pool structures where the CPO is actively selecting and managing the pool’s CTAs. Brokerage Commissions: The commission rate that the clearing or carrying broker charges is quoted on a “round-turn” basis, which means the amount charged for the purchase and sale, or sale and purchase, of one futures contract. This is unlike securities or securities options brokerages which charge per side—buy and sell. Often a portion of the brokerage commission is paid to the commodity pool’s CPO, CTA or selling agents in lieu of other forms of compensation and for other services related to the investment, such as monitoring, reporting, and facilitating transfers and redemptions. 17 Sample Performance Reports On the following pages are sample illustrations from two independent reporting services, the Barclay Trading Group and MAR (Managed Account Reports). Both ser- vices provide detailed information regarding managed futures and CTAs including statistics, track records, fees, drawdowns, etc. For more information on these and other services, see Appendix 2. 18 Account Information Management Fee: 2.00% M/E Ratio: 12.00% Incentive Fee: 20.00% Options: 0.00% Minimum Acct: $5000K Discretion: 0.00% RT/Yr/$ Million: 1000 Interbank: 20.00% Performance Analysis Start Date: 03/83 Total Return Since Start Date: 7964.33% Compounded Average Annual ROR: 30.84% Average Monthly ROR: 2.71% Standard Deviation of Monthly ROR: 9.90% Number of Winning Months: 114 Average Gain: 8.19% Number of Losing Months: 82 Average Loss: –4.89% Relative Volatility Loss of 25% or more: 25.96% Loss of 50% or more: 7.62% QPA: 2.94 Drawdown Report Length Recovery Depth (Months) (Months) Start Date End Date 34.27 2 12 May–83 Jul–83 25.52 3 7 Jun–86 Sept–86 22.19 5 2 Nov–87 Apr–88 19.60 4 7 Jun–94 Oct–94 18.34 7 4 Jun–88 Jan–89 18.31 5 4 Dec–90 May–91 17.42 1 1 Jul–84 Aug–84 Reward/Risk Ratios 3-Year Cumulative Sharpe Ratio: 0.85 0.73 Sterling Ratio: N/A 0.82 Barclay Ratio: 3.27 0.62 Efficiency Index: 1.16 0.90 Trading Method Reflects the performance of the DIVERSIFIED TRADING PROGRAM, a systematic computer based strategy using time series analysis. A mathematical algorithm determines the profitability of more than 80 exchange traded markets and selects those markets with greatest propensity to perform consistently. A market by market asset alloca- tion system re-weights exposure based on relative volatility, and systematic rebalancing to a targeted mean variance portfolio rate of return is conducted periodically. Returns are gross of all fees. Correlations Barclay Index: 0.69 S&P 500: –0.05 U.S. Treasury Bonds: 0.14 EAFE: –0.07 World Bonds 0.12 Time Windows Length (Months) Best Worst Average 1 43.44% –22.12% 2.71% 3 85.35% –26.89% 8.13% 6 149.29% –27.17% 16.71% 9 234.06% –21.42% 26.20% 12 279.94% –16.64% 36.90% 18 337.08% –9.33% 61.17% 24 434.23% –0.77% 86.89% Sample Capital Management, Inc. (Diversified) 123 East Main St. Anywhere, USA 12345 Ph. 555-555-5555 fax 888-888-8888 2nd Quarter 1999 Annual Returns 1995 1996 1997 1998 1999 YTD Advisor 28.74% 4.16% 27.02% 12.19% 6.12% Barclay CTA Index 13.65% 9.13% 10.90% 7.00% 1.75% Funds Managed ($ millions) 51.2 53.3 67.7 65.0 60.0 The Barclay Institutional Report 515-472-3456 Copyright 1999 by Barclay Trading Group, Ltd., 508 N. 2nd St., Suite 201, Fairfield, IA 52556. Reproduction in any form without permission is forbidden. Reports are based on information and data supplied by the subjects of each and from other sources, and are believed to be accurate, but must be accepted with no guarantee of completeness or accuracy by the publisher. Reprinted with permission of Barclay Trading Group. (Management company identity withheld for privacy.) 19 Performance History DATE VAMI ROR Jul–95 1000 –1.15 Aug–95 978 –2.15 Sep–95 976 –0.28 Oct–95 973 –0.25 Nov–95 999 2.65 Dec–95 1043 4.38 Jan–96 1045 0.25 Feb–96 951 –9.01 Mar–96 957 0.65 Apr–96 1011 5.61 May–96 980 –3.04 Jun–96 979 –0.15 Jul–96 1015 3.73 Aug–96 1014 –0.14 Sep–96 1037 2.28 Oct–96 1078 3.96 Nov–96 1127 4.51 Dec–96 1086 –3.61 Jan–97 1116 2.74 Feb–97 1178 5.57 Mar–97 1175 –0.23 Apr–97 1130 –3.87 May–97 1142 1.03 Jun–97 1186 3.89 Jul–97 1342 13.12 Aug–97 1282 –4.47 Sep–97 1324 3.34 Oct–97 1339 1.13 Nov–97 1312 –2.06 Dec–97 1380 5.18 Jan–98 1439 4.28 Feb–98 1427 –0.79 Mar–98 1437 0.68 Apr–98 1373 –4.46 May–98 1395 1.59 Jun–98 1364 –2.21 Jul–98 1369 0.33 Aug–98 1556 13.70 Sep–98 1688 8.45 Oct–98 1567 –7.14 Nov–98 1531 –2.31 Dec–98 1548 1.12 Jan–99 1477 –4.57 Feb–99 1603 8.49 Mar–99 1575 –1.70 Apr–99 1652 4.89 May–99 1589 –3.85 Jun–99 1643 3.39 The Barclay Institutional Report 515-472-3456 Copyright 1999 by Barclay Trading Group, Ltd., 508 N. 2nd St., Suite 201, Fairfield, IA 52556. Reproduction in any form without permission is forbidden. Reports are based on information and data supplied by the subjects of each and from other sources, and are believed to be accurate, but must be accepted with no guarantee of completeness or accuracy by the publisher. VAMI vs Barclay & S&P 500 $3500 $3000 $2500 $2000 $1500 $1000 $500 0 Jul 93 Jan 94 Jul 94 Jan 95 Jul 95 Jan 96 Jul 96 Jan 97 Jul 97 Jan 98 Jul 98 Jan 99 Returns for Preceding 12-month Periods 35% 30% 25% 20% 15% 10% 5% 0% –5% VAMI Barclay Index S&P 500 Total Return Index Jun 95 Sept 95 Dec 95 Mar 96 Jun 96 Sep 96 Dec 96 Mar 97 Jun 97 Sep 97 Dec 97 Mar 98 Jun 98 Sep 98 Dec 98 Mar 99 Jun 99 Rate of Return Period Ending Distribution of Monthly Returns 60 50 40 30 20 10 0 <–50% –50% to –45% –45% to –40% –40% to –35% –35% to –30% –30% to –25% –25% to –20% –20% to –15% –15% to –10% –10% to –5% –5% to –0% 0% to 5% 5% to 10% 10% to 15% 15% to 20% 20% to 25% 25% to 30% 30% to 35% 35% to 40% 40% to 45% 45% to 50% > 50% Number of Months 20 Performance of Trading Advisors Through August, 1999 (Partial List) MinimumPctPctPctPct11236InitialCurrentMgmt/ InvestmentStartChangeChangeChangeChangeMoYTDMoMoEquityEquityIncentMarket Advisor/Program NameRequiredDate1 MoYTD12 Mo 36 MoRankRankRankRank(Mil)(Mil)FeesFocusMethodology EICKELBERG & ASSOCIATES (PHOENIX)1,000,0001/94–2.6–9.1–1.177.830232624668.137.540/25DIVSystematic EIGER FUTURES MGT (INDEX)25,0009/93–88.4–89.1–96.1173371359289.014/20STXSystematic ELM FINANCIAL (GL FINANCIAL)250,0006/91–5.8–3.37.269.93552581558765.3323.002/20DIVSystematic EMC CAPITAL MGT (CLASSIC)2,000,0001/85–.9–3.1–4.841.02462542801571.2756.972/20DIVSystematic EMC CAPITAL MGT (NEW)2,000,0008/96–1.4–4.2–.427.12592702352061.0710.612/20DIVSystematic ESSEX TRADING (BALANCED GROWTH)100,0005/95–1.66.919.888.2266997557.102.072/20DIVSystematic ESTLANDER & RONNLUND (GLOBAL)5,000,0008/91–.1–11.0–14.354.1218334327122.2457.302/20DIVSystematic EURODOC TRADING ADVISORS (ACTUARIAL)500,0008/972.22.3174168204.322/20FINSystematic FINAGRA MGT (AIG COMMODITY)1,000,0008/971.216.624.498465420.0086.002/20AGDiscretionary FINAGRA MGT (SOFT COMMODITY)Closed 10/95.017.923.845.71554258142.322.242/20AGDiscretionary FIRST QUADRANT (GLOBAL TACTICAL)5,000,0006/898.15.72.61758417525850.002/20DIVSystematic FIRST QUADRANT (TACTICAL CURRENCY)5,000,0004/921.75.012.01761751852391.542/20CURSystematic FIRST SOUTHEASTERN CAPITAL MGT200,00012/98–3.415.5322513.905.431/20DIVSystematic FORT (GLOBAL INCOME)1,000,00010/931.31.418.043.695184821505.0020.982/20DIVSystematic FORT ORANGE CAPITAL (GLOBAL STRATEGIC)1,000,0009/92–2.2–22.0–15.9128.9285364331301.0758.153/15DIVTrend-based FRIEDBERG COMMODITY MGT (CURRENCY)50,0001/86–3.319.0–15.933.131635332181.2880.993/0CURDiscretionary FRIEDBERG COMMODITY MGT (DIVERSIFIED)150,0007/94–7.9–28.9–27.72.1364367354260.148.623/25DIVDiscretionary MICHAEL J FRISCHMEYER (ICL FEE)40,0001/81–3.07.82.1–30.730887205282.597.111/20DIVTrend-based MICHAEL J FRISCHMEYER (REGULAR)40,0003/94–3.0–2.3–6.9–37.7309243293285.631.25.33/20DIVTrend-based FUNDAMENTAL FUTURES100,0001/79–5.7–16.5–27.2177290338281.474/15AGDiscretionary FUTURES TRADING CONCEPTS (GLOBAL DIV)2,000,0001/957.112.6153.017897114251.452/25DIVTrend-based FUTURES TRUTH100,0009/95–.6–7.1–11.9–19.3240307319279.83.952/20DIVTrend-based FX CONCEPTS (DEVELOPED MARKETS CUR)1,000,0005/88–.416.947.31792158713750.001/20CURSystematic FX CONCEPTS (EMERGING MARKETS CUR)1,000,00012/9721.326.818032492.381/20CURSystematic GAIACORP IRELAND (10% RISK)3,000,0006/96.97.12.129.511395207195.6510.392/20CURSystematic GAIACORP IRELAND (25% RISK)1,000,0001/951.614.36.257.8895616611110.8714.602/20CURSystematic GAIACORP IRELAND (FX)5,000,0001/951.614.36.250.290571671325.282.332/20CURSystematic GAMMA CAPITAL MGT1,000,0001/97–5.25.01812861842.002/20DIVSystematic GATEWAY FUTURES1,000,0001/92–3.31.4–.132.3317182228184.5023.392.5/20FINSystematic GERLING & COMPANY PTY100,0001/97.33.2–2.8143148264.301.173/20DIVTrend-based GK CAPTIAL (DISCRETIONARY)250,00010/95.8–8.9–4.161.0116322274102.202.802/20DIVDiscretionary GLACIER CAPITAL MGT100,0009/966.5–7.3–12.624.116311320215.10.182/20DIVTrend-based GLACIER CAPITAL MGT (EXPANDED DIV)250,0004/99.3140.50.452/20DIVTrend-based GLECKMAN CAPITAL MGT (FINANCIAL FUT)125,0003/98–2.1–6.52.8283295201.201.840/25FINSystematic GLOBAL CAPITAL MARKETS STRATEGIES250,0008/96–4.4–6.5–.653.6336299237126.157.802/25DIVSystematic GNI FUND MGT (BEACH-TECHNICAL)5,000,0006/94.011.119.892.81566974552.64240.003/20DIVSystematic GNI FUND MGT (HCM-HAIDAR)100,0005/97.6–1.9–2.61192362625.0035.202/20DIVSystematic GOLDMAN MGT100,0001/872.84.624.4182153187213.202/20STXDiscretionary GOLLYHOTT TRADING (DISCRETIONARY)5,000,0001/931.01.37.0262.410818515781.6045.562/20DIVDiscretionary GOLYHOTT TRADING (SYSTEM)5,000,0003/98–5.2–4.8–1.034628124311.3322.202/20DIVSystematic GOTHAM INVEST MGT GROUP (DIV A)1,000,0004/98–18.8–9.6–6.9375329295.241.402/20DIVSystematic GOTHAM INVEST MGT GROUP (DIV B)300,0001/99–20.0–13.3376341.96.712/20DIVSystematic GOTHAM INVEST MGT GROUP (DIV C)150,0004/99–22.9377.15.132/20DIVSystematic GRINHAM MANAGED FUTURES PTY LTD2,000,0009/93–3.5–4.5–1.240.8327275248158.40300.002/20DIVSystematic HAMPTON INVESTORS (3X)500,0007/95–.5–6.010.1211.823429313114.2581.002/20STXSystematic HANSEATIC (DISCRETIONARY)500,0002/96–2.2–19.09.2310.02863571415.0410.212/20DIVDiscretionary HANSEATIC (GLOBAL)500,00011/962.83.416.55614391.715.692/20DIVDiscretionary HANSEATIC (PLUS YIELD ENHANCEMENT)500,0004/91–.1–1.5–1.35.42192282492525.0022.625/20CURSystematic HANSEN CAPITAL MGT1,000,0004/94–.215.816.32.922549932571.0012.032/25DIVSystematic HARBOUR MGT (ORIGINAL)200,0006/91–7.5–6.7–15.68.0362304329247.292.003/20DIVTrend-based HARBOUR MGT (MULTI-SYSTEM)500,0003/99–4.8341.522.712/20DIVSystematic HARGRAVE FIN GROUP (BOND ONLY)50,0008/989.030.491.310229.261.100/25FINSystematic HATHERSAGE CAPITAL (ACCELERATED)1,000,00012/91–6.05.644.7303.63571171961.291.702/20CURDiscretionary HATHERSAGE CAPITAL (DAILY GROWTH)500,0001/92–.218.450.1144.7226381628.5520.402/20CURDiscretionary HATHERSAGE CAPITAL MGT (LONG TERM)1,000,0008/91–1.910.623.8128.02767159311.0010.902/20CURDiscretionary HAWKSBILL CAPITAL (GLOBAL DIVERSIFIED)2,000,0001/85–8.9–6.5–1.4158.836830025020.0928.902/20DIVTrend-based Sample/ Illustration OnlySource: MAR The past decade has been witness to tremendous growth in the assets committed to managed futures. Institutional and private investors alike have become aware of the benefits associated with an investment in managed futures: access to foreign markets and commodities, the ease of going long or short to benefit from general price moves, enhanced returns and reduced portfolio risk, and the liquidity associated with global futures markets. Managed futures present investors with another way of attaining investment return objectives and achieving port- folio diversification. For further information on the merits of including managed futures in a diversified investment portfolio, see the information sources in Appendices 2 and 3, or call the Chicago Mercantile Exchange. 21 Conclusion 22 Drawdown: The dollar amount of a decline in perfor- mance of an investment from peak to trough. The depth and length of drawdown periods and the time taken to recover to the previous peak are closely watched factors. Equity: The dollar value of a futures trading account if all open positions were offset at the going market price. Futures Commission Merchant (FCM): A brokerage organization that does both of the following: (1) solicits or accepts orders to buy or sell futures contracts or futures options, and (2) accepts money or other assets from customers to support such orders. Futures Contract: A standardized, legally binding agreement to buy or sell a specific quantity or grade of a commodity at a later date. Freely transferable and traded only by public auction on designated exchanges. Incentive Fee: Fee based on performance that typically is charged quarterly by the CTA for managing a customer’s account. This fee equals a specified percentage of new net profits, and generally is only charged if the net equity for the account for a given quarter exceeds its highest previous quarter-end net equity. Also referred to as Performance Fee. Managed Account: A brokerage account at an FCM in which discretionary authority to direct trading is delegated to a CTA. See Discretionary Account. Management Fee: Fee, based on amount of assets under management, that is charged by the CTA or CPO for managing a customer’s account. This fee, typically charged monthly or quarterly, equals a specified percentage of the equity in the customer’s account. Clearing Member: Generally, a firm that is a member of an exchange clearing organization. Exchange clearing members have the ultimate responsibility for the financial commitments of customers who clear futures transactions through them. Commodity Pool: An enterprise, usually in the form of a limited partnership, in which funds contributed by a number of investors are combined for purposes of trading futures or commodity options. Commodity Pool Operator (CPO): An individual or organization that operates or solicits funds for a com- modity pool. Generally required to be registered with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA). Commodity Trading Advisor (CTA): An individual or organization that directly or indirectly advises others on the buying and selling of futures interests for com- pensation. Generally required to be registered with the CFTC and the NFA. Disclosure Document: A document that every registered CTA and CPO is required to supply when soliciting customers; typically contains disclosure statements, information about the CTA’s business background and trading methodology, as well as the CTA’s Advisory Agreement and other agreements between the CTA and its client. The Disclosure Document must contain the actual performance record of customer accounts traded for the past three years. Discretionary Account: An arrangement by which the owner of the account gives written power of attorney to a CTA to buy and sell without prior approval of the account owner. Often referred to as a Managed Account. Appendix 1: Glossary of Terms Manager of Managers: An individual or organization that allocates assets to CTAs and manages the allocations on behalf of investors. Generally registered as a CTA and CPO with the CFTC. Also referred to as a Trading Manager. Margin: see Performance Bond. Net Asset Value: The value of each unit of participation in a commodity pool. Basically a calculation of assets minus liabilities plus or minus the value of open positions when marked to the market, divided by the number of units. Net Equity: The ledger balance plus open trade equity. Net Performance: Increase or decrease in Net Asset Value exclusive of additions, withdrawals and redemptions. Notional Funds: Funds that a client has committed to trading under the management of a CTA, but that are not physically on deposit in the client’s trading account. Performance Bond: The amount of money or collateral deposited by a customer with his broker, or by a broker with the clearing organizations, for the purpose of insur- ing the broker or clearing organization against loss on open futures contracts. Also known in the futures indus- try as “margin.” Performance Fee: See Incentive Fee. Sharpe Ratio: Developed by William Sharpe of Stanford University, this ratio is one of the key risk/reward ratios used by the industry. It compares the rate of reward from an investment with the risk incurred in gaining that reward. The formula is the annualized rate of return minus the risk-free rate divided by the annualized standard deviation. 23 Standard Deviation: The degree to which each monthly return clusters about the mean. In a normal distribution, 68% of the months will be within one standard deviation of the mean and 95% will be within two standard deviations of the mean. Standard deviation is computed arithmetically. Trading Manager: See Manager of Managers. Information on CTAs, managed futures and commodity pools, as well as how to open managed accounts or pur- chase limited partnership interests in a commodity pool, can be obtained from the Chicago Mercantile Exchange (www.cme.com), other futures exchanges, futures commission merchants (FCMs) and from the following sources: Independent Reporting Services: Barclay Trading Group, Ltd. 508 N. 2nd St., Suite 201 Fairfield, IA 52556 515-472-3456 www.barclaygrp.com Managed Accounts Reports (MAR) 220 5th Avenue, 19th Floor New York, New York 212-213-6202 www.marhedge.com TASS Management Limited Charter House 1315 Carteret London SW1H9DJ United Kingdom 44 207 222 0099 TASS Management (NY office) 555 Theodore Fremd Ave. Suite C206 Rye, New York 10580 212-751-1252 www.tassman.com 24 Publications: Futures Magazine 250 S. Wacker Drive, Suite 1150 Chicago, IL 60606 Regulatory Agencies Commodity Futures Trading Commission Three Lafayette Center 1155 21st Street NW Washington, DC 20581 202-418-5020 www.cftc.gov National Futures Association 200 West Madison Street, Suite 1600 Chicago, IL 60606-3447 312-781-1300 www.nfa.futures.org Industry Associations Managed Futures Association 1200 19th Street NW, Suite 300 Washington, DC 20036-2422 202-828-6040 www.mfainfo.org Futures Industry Association 2001 Pennsylvania Ave. NW, Suite 600 Washington, DC 20006 202-466-5460 www.fiafii.org Appendix 2: Industry Information Sources Academic Research & Books Ankrim, Ernest M., and Chris R. Hensel. “Commodities in Asset Allocation: A Real-Asset Alternative to Real Estate?” Financial Analysts Journal, (May–June 1993) pp. 20–29. Chandler, Beverly. Managed Futures. New York: John Wiley, 1994. Irwin, Scott H., Terry Krukmeyer, and Carl R. Zulauf. “Investment Performance of Public Commodity Pools: 1979–1990,” The Journal of Futures Markets, (October 1993) pp. 799–820. Lummer, Scott and Lawrence B. Siegel, “GSCI Collateralized Futures: A Hedging and Diversification Tool for Institutional Investors,” The Journal of Investing, (Summer 1993), pp. 75–82. Peters, Carl C. (ed.) Managed Futures—Performance, Evaluation and Analysis of Commodity Funds, Pools and Accounts, Chicago: Probus Publishing, 1992. Schwager, Jack. Managed Trading—Myths/Truth. New York: John Wiley, 1996. 25 News Articles Angrist, Stanley W. and Elyse Tanouye. “Managed Futures Can Provide a Cushion for Declines in an Investor’s Portfolio,” The Wall Street Journal, February 19, 1992, C1. Angrist, Stanley W. “The Big Money Gives Futures a Whirl,” The Wall Street Journal, May 11, 1992, C1. Cavaletti, Carla. “1999: The Year Managed Futures Breaks Out?” Futures Magazine, May 1, 1999. Dubin, G., G. Hornig, and H. Swieca. “Experts Offer Look at Economic Value of Managed Futures,” Pension World, May 1992, pp. 12–13. Durr, Barbara. “Managed Futures Industry Given First Break,” Financial Times, May 8, 1992, p. 19. Hart, Patrick III and Richard Bornhoft. “Managed Futures Being Placed in Fund Portfolios,” Pension World, April 1992, pp. 23–25. Hentschel, Ludger and Clifford W. Smith. “Controlling Risks in Derivatives Markets,” The Journal of Financial Engineering, Vol. 4, No. 2, June 1995. Lenzer, Robert. “How to Invest Like a Billionaire,” Forbes Magazine, October 1998, p. 54. “Pension Capital May Give Boost to Commodity Fund Trading,” Journal of Commerce, April 13, 1992, 6A. Rehfeld, Barry. “What Else Is New?” Institutional Investor, May 1, 1997, p. 41. Szala, Ginger. “What Pension Plan Pros Think of Managed Futures,” Futures, April 1992, pp. 56–58. Appendix 3: Managed Futures Bibliography Many of the items in this publication are based on secondary materials which are believed to be reliable, but which are not guaranteed as to accuracy or complete- ness. Examples in this publication are based on hypothetical fact situations and should not be considered investment advice. Past performance figures are not necessarily indicative of future returns. All matters pertaining to rules and specifi- cations are made subject to and are superseded by official Chicago Mercantile Exchange rules. Current CME rules should be consulted in all cases concerning contract specifications. “Standard & Poor’s®”, “Standard & Poor’s 500®”, “S&P®”, and “500” are trade- marks of The McGraw-Hill Companies, Inc. and have been licensed for use by the Chicago Mercantile Exchange. The Nikkei Stock Average is owned by and proprietary to Nihon Keizai Shimbun. The Russell 2000® Index is a registered trademark and servicemark of Frank Russell Company. Frank Russell Company assumes no liability in connection with the trading of any contract based on the Russell 2000 Index. “GSCI®” is a registered trademark of Goldman Sachs & Co. and has been licensed for use by the Chicago Mercantile Exchange. The Nasdaq 100 Index®, Nasdaq 100®, and Nasdaq® are registered marks of The Nasdaq Stock Market, Inc. (which with its affiliates are the Corporations) and are licensed for use by the Chicago Mercantile Exchange in connection with the trading of Futures and Futures Options based on the Nasdaq 100 Index (Products). The Products have not been passed on as to their legality or suitabil- ity. The Products are not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO SUCH PRODUCTS. 26 Trading in futures contracts and options on futures is not appropriate for all per- sons. It should never be engaged in by any person who does not have sufficient, accurate and balanced information about the investment being considered, including a clear description and explanation of the risks. The examples on page 5 do not take into account any fees and commissions; when evaluating any investment you should always take into account any fees, commissions and expenses. In this publication, the performance of “managed futures” is represented by two different indexes—the Barclay CTA Index and the MAR dollar-weighted CTA Index. Both the Barclay and the MAR CTA indexes attempt to represent the combined performance of a limited selection of CTAs for whom track records are available. Of course, the performance of an individual managed account or futures fund could vary substantially from the performance of these “managed futures” indexes. For more information on these indexes or the managed futures industry in general, please see the information sources on page 25. This publication was developed for general educational purposes and is not a substitute for any prospectus or disclosure document that is required to be given to prospective customers.